Approved /Proposed Nasdaq rule modifications

By: Cydney Posner

Discussed below are several recently approved or proposed modifications to the Nasdaq rules:

The SEC has posted a Nasdaq Proposal and Order Granting Accelerated Approval to modify an aspect of the definition of independent director.  Under current Nasdaq Rule 4200(a)(15)(B), a director of a listed issuer is generally not considered independent if that director has received more than $60,000 in compensation from the issuer during any period of 12 consecutive months within the three years preceding the date of determination of independence. The proposed rule change would raise this amount to $100,000, a level comparable to that used in the NYSE independence standard. The SEC noted that a board would still be required to make an affirmative determination that an "independent" director has no relationship with the issuer that would impair his or her independence, even outside of the "bright line" tests of the independence definition. The SEC approved the rule change on an accelerated basis.

Nasdaq has filed with the SEC a proposal to modify the Nasdaq conflict-of-interest provisions (not yet posted on the SEC's website) to eliminate the requirement in Nasdaq Rule 4350(h) that related-party transactions be approved by a listed company’s audit committee or another independent body of the board of directors. The proposed rule would continue to require review of related-party transactions for potential conflicts of interest by the company's audit committee or another independent body of the board on an ongoing basis, but no approval by the committee would be required. Nasdaq believes that the SEC's new related-person disclosure requirements will advance the trend toward obtaining approval of related-person transactions, reducing the need for a specific SRO approval requirement. In addition, in some cases, appropriate disclosure may itself obviate the need for approval. The proposed rule change is expected to provide greater clarity and transparency to Nasdaq’s requirements, promote uniformity with existing standards of the NYSE and AMEX (neither of which requires approval) and reduce administrative costs.

Nasdaq has also filed with the SEC a proposed rule change (not yet posted on the SEC's website) to modify IM-4300 to provide additional transparency regarding how Nasdaq applies its public interest authority. These proposed modifications explain in Interpretive Material how Nasdaq may use its authority under Rule 4300, for example, to deny initial or continued listing to an issuer when an individual with a history of regulatory misconduct is associated with the issuer. The new factors to be taken into account include:

• the nature and severity of the conduct, taken in conjunction with the length of time since the conduct occurred;
• whether the conduct involved fraud or dishonesty;
• whether the conduct was securities-related;
• whether the investing public was involved;
• how the individual has been employed since the violative conduct;
• whether there are continuing sanctions against the individual;
• whether the individual made restitution;
• whether the issuer has taken effective remedial action; and
• the totality of the individual's relationship to the issuer, giving consideration to:
  •  the individual’s current or proposed position;
  • the individual’s current or proposed scope of authority;
  • the extent to which the individual has responsibility for financial accounting or reporting; and
  • the individual’s equity interest.

Nasdaq is willing to discuss potential remedial action with the issuer, but, depending on seriousness of the problem, may ultimately deny initial or continued listing based on these public interest considerations. Listing denials are subject to appeal. Because assessments of public interest may present difficult policy determinations, the Nasdaq staff may, in its discretion, informally discuss the matter with a member of the Nasdaq Listing and Hearing Review Council designated by its Chairperson. (The member would then be recused from participation in any subsequent adjudicatory proceedings concerning the matter.)

Finally, Nasdaq has proposed a rule change (not yet posted on the SEC's website) to address failures to comply with Nasdaq’s requirements concerning direct registration programs (Remember that both Nasdaq and the NYSE will require eligibility to participate in the Direct Registration System (DRS) as part of their listing requirements, thus mandating that companies' charters and bylaws permit book-entry shares. See Deidre's email of 12/05/06.) Under this revision, generally, issuers with deficiencies would receive 15 days' notice to submit a plan to regain compliance. Thus, if a company is not eligible for a direct registration program on a timely basis, Nasdaq staff would review the company’s plan to regain compliance and could allow the company up to 105 days from the date that Nasdaq notifies the company of the deficiency to regain compliance. If the staff does not accept the company’s plan, or the company does not comply in the time allowed by the staff, Nasdaq would issue a delisting letter, which could be appealed under Nasdaq Rule 4805(a).